As part of our commitment to superior service, Lee & Associates provides advice and expertise to help you navigate the commercial real estate market. Understanding the vocabulary is an important part of making informed decisions for your business. Listed below are some of the most commonly used terms in leasing, sales, and contracts. If you have any questions feel free to get in touch with us.
Capitalization (CAP) Rate: The interest rate at which earnings, dividends, or cash flows are converted into value or equity. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of income producing properties.
Debt Coverage: Amount by which the net rent of a project exceeds the annual debt cost. Typically expressed as a ratio.
Debt Service: The total annual debt payment calculated by multiplying the loan constant by the outstanding loan balance.
Net Operating Income (NOI): The effective gross income from a property minus operating expenses.
Net Present Value (NPV): A future cash flow adjusted to present value. It can include allowances, inducements and free rent, in order to give a more realistic comparison base for several properties.
Vendor Take-Back: Describes a mortgage in which a vendor finances the sale of a property by lending the money to the purchaser.
Lease and Sale
Base Rent: The basic rent payable by a tenant under a lease. Often referred to as a net-net-net lease or a triple net lease. Covers the amount payable based on the rentable area of the premises and excludes operating costs, taxes and tenant expenses.
Effective Rent: Includes the contracted base rent, plus all additional costs, less any concessions and allowances. Typically based on the annual as opposed to the monthly rent.
Gross Lease: A lease in which the tenant pays a fixed rent and the owner pays all operating costs such as insurance and taxes associated with the property, including repairs.
Gross Rent: The total rent including basic rent, taxes, operating costs and management fees.
Leasehold: The interest of estate that a lessee of a real estate holds under the provision of a lease.
Leasehold Improvements: Additions and improvements made by the tenant or landlord to the leased premises, most commonly associated with interior finishing and mechanical systems provided by a commercial tenant or landlord pursuant to a lease agreement.
Net Lease: A lease under which the tenant pays the agreed-upon rent plus utilities and taxes.
Net-Net-Net Lease: A lease under which the tenant pays the base rent plus all the costs of maintenance, repair, taxes and operating fees. Also called Triple Net Lease.
Net Rent: The base rent, usually per square foot, per year and does include any extra costs (i.e., management fees, hydro, etc.).
Percentage Lease: A lease under which the tenant pays a fixed minimum monthly rent plus a percentage of his or her gross monthly income in excess of that minimum. Used primarily in retail leases.
Property Transfer Tax: A tax incurred on a parcel of land when ownership is transferred (1% on first $200,000 of the land price; 2% on remaining value).
Sale/Leaseback: Transaction in which property interest is sold to another party but original owner retains a long or short term leasehold interest in the property.
Building and Structure
Common Area Maintenance (CAM): Additional fees on top of a base rent agreement that includes taxes, maintenance (landscaping, snow removal, etc.) as well as any other pertinet costs to occupy a building. Also referred to as TMI (Taxes, Maintenance and Insurance) or taxes and operating expenses.
Contiguous: The maximum area (as made up of more than one individual listing) that a landlord would lease to a tenant. A landlord may lease all or part of a contiguous block of space.
Divisible: The smallest unit of space that a landlord would demise from a larger unit and make available to a tenant. Also known as minimum divisible.
Easement: A right to use the land of another for a specific purpose, such as a right of way or for utilities. An easement passes with the land when it is sold.
Floor Space Ratio (FSR): The ratio of total floor area of a building to the total land area on which the building is located – often used in reference to zoning and land-use planning.
Zoning: Rules established by various levels of government which dictate how specific parcels of land may be used and often specify the height and/or type of building that can be developed on a parcel. Zoning By-laws are the mediums to which Zoning is enforced.
Contracts and Agreements
Agreement/Contract/Offer to Purchase: A written document by which one party agrees to sell and another agrees to purchase and title passes upon payment of an agreed purchase price.
Agreement/Contract/Offer to Lease: An agreement by which one party, the lessor, agrees to lease to another party, the lessee, certain premises as set out in the agreements.
Conveyance: The transfer of an interest in property from one party to another; the means or medium by which legal title to property is transferred.
Exclusive Agency Listing: A listing contract under which the owner appoints a real estate broker as the one exclusive agent for a designated period of time to sell or lease a property on stated terms, under which the owner agrees to pay the broker a commission.
Exclusive Right to Sell: A listing which the owner appoints a real estate broker as the exclusive agent for a designated term. The broker must sell the property on stated terms whereby the owner agrees to pay the broker a commission.
Fee Simple: The highest estate or absolute right of ownership or real property, it can be held without time limitation and is freely transferable and inheritable.
First Right of Refusal: A sale concession that gives a tenant the first right, within a limited period of time, to a designated additional space that another prospective tenant has expressed a desire to sell. Can also be applied to lease transactions.
Listing Agreement: An written agreement under which the owner appoints a real estate brokerage for a designated period of time to sell, lease or exchange property based on the owner’s stated terms, and under which the owner agrees to pay the brokerage commission.
Security Deposit: A monetary deposit providing security to a landlord in case a tenant defaults on payments or damages their property.
Statement of Ddjustment: Accounting procedure that takes place at the completion of a sale to account for the responsibility of various pre-payments or deficiencies between the vendor and the purchaser.
Tenant and Landlord Subjects: Agreed upon list of conditions that must be met prior to final contract and agreement of transaction. Examples of subjects include: credit checks, pre-approval of business licenses and approvals for financing.